China's Richest Man Wants to Go Shopping

Bloomberg News

March 17, 2011, 5:00 PM EDT

Zong Qinghou, with a fortune estimated to be at least $8 billion, has a reputation as a bit of a cheapskate. The soda and juice magnate says his personal spending averages just $20 a day. He doesn’t gamble, drink, or play golf. He eats his meals at the company canteen. Zong’s frugality is mirrored in how he runs Hangzhou Wahaha Group, the third-largest soft-drink company in China. Its headquarters for more than two decades has been in a six-floor building next to a railway station in the eastern Chinese city of Hangzhou. Former Wahaha marketing director Shang Yang says he remembers Zong, a Communist Party member, personally reviewing every expense, including the purchase of a broom. Explains Shaun Rein, managing director of China Market Research Group: “One of the reasons he’s been so successful is he keeps costs down.”

Zong, 65, says he’s now ready to start spending. Privately held Wahaha has accumulated $2 billion that Zong plans to use to expand the company. He wants to build 100 department stores as well as supermarkets. The company Zong started with a 140,000 yuan ($21,300) loan in 1987 aims to boost sales 27 percent this year, to 70 billion yuan, he says. “I want Wahaha to be among the world’s top 500 companies within five years,” says Zong, a delegate to China’s Parliament, whose ranking shot up from No. 63 on Forbes‘ list of richest Chinese in 2007 to the top slot last year.

Wahaha (it sounds like a baby’s laugh in Chinese) will set up stores in second- or third-tier Chinese cities, Zong says, following the strategy he used to turn an ice-pop and soda shop into a beverage giant with a higher market share than PepsiCo (PEP) in the world’s most populous nation. Shang, Wahaha’s national marketing director from 1998 to 2003, says that Zong mimics Mao Zedong’s tactic of “surrounding the cities from the countryside.” The game plan brought Zong’s company, the maker of Wahaha-brand juices and mineral water, a 7.2 percent share of China’s soft-drink market, according to researcher Euromonitor International. It trails Coca-Cola’s (KO) 17.2 percent share and Tingyi (Cayman Islands) Holding’s 13.2 percent. PepsiCo ranks fourth at 6.6 percent.

Zong says building department stores and supermarkets across China will allow him to enter businesses that have higher margins than manufacturing while taking advantage of Wahaha’s already far-flung distribution network. Since urban centers such as Beijing, Shanghai, and Guangzhou already have been “conquered by established players” such as big Chinese retailer Parkson Retail Group, he says, there’s greater potential in smaller cities.

The son of a government clerk, Zong began work as a brine collector at a salt farm in the port city of Zhoushan soon after finishing middle school. A year later, he says, he heeded Mao’s call to work in China’s countryside, moving to an agricultural farm where he worked for 14 years. “Zong knows China’s rural markets, and if Wahaha were to go into retail it would make sense for them to go into retail in second-tier, third-tier, or even fourth-tier cities, because land prices are much lower, especially in central and western China,” says Jason Yuan, an analyst at UOB Kay Hian Holdings in Shanghai.

Wahaha is already in talks with some city governments as it may need to buy land to open stores, Zong says. One thing it doesn’t need is money. Last year, Wahaha’s revenue grew 27 percent, to 55 billion yuan. “Sitting on a big cash pile of 13 billion yuan, it’s very difficult to know what to do with it,” says Rupert Hoogewerf, founder of The Hurun Report, a tracker of China’s wealthy that estimates Zong’s fortune at $12 billion, 50 percent more than Forbes. “His key business doesn’t need that much extra money to invest.”

When Zong isn’t traveling to meet distributors, he gets to work at 7 a.m. and finishes at about 11 p.m. His office, a triangular 650-square-foot room, has a bed he uses when he can’t make it home. “I spend less than my employees,” he says, “simply because I have no time.”

The bottom line: Chinese beverage billionaire Zong Qinghou will use his company’s $2 billion in expansion cash to move into retailing in small cities.